Data processing systems implemented by programmed computers have been used in a variety of different ways with respect to a variety of insurance products and to employee benefits in general.
U.S. Pat. No. 4,648,037 of Valentino relates to a software system for permitting employees to access information by a terminal connected to that system. The system is capable of displaying on demand the value of their savings plans, withdrawal information, benefit information re the employee's life insurance, disability insurance, vested retirement etc.
U.S. Pat. No. 4,837,693 of Schotz relates to a computerized system for implementing and administering a group life insurance plan, which has conversion rights. The system gathers employee and employer information and summaries that information to generate and display reports. The system also calculates employee contributions.
U.S. Pat. No. 5,429,506 of Brophy et al. relates a premium paying corporate life insurance plan with a voluntary employee group life plan. In particular, the system determines the split of premiums between the employer and the employee in a manner to give the employee a death benefit and to permit the employer to invest funds in the cash value of a single life insurance contract.
U.S. Pat. No. 5,191,552 of Bosco et al. relates to an integrated computer system including a plurality of data processing systems, each system for administering at least one of the underwriting, administration and actuarial functions. The data processing systems are tied to an enterprise-wide relational data base.
U.S. Pat. No. 5,590,037 of Ryan et al. relates to a computer system for generating a financial forecast for a life insurance contract, and creating a model or an illustration of a life insurance contract subject to an indenture as a means for prefunding future employee benefits.
U.S. Pat. Nos. 4,969,094 and 4,750,121 of Halley et al. relate to a system for administering a wide range of insurance activities including enrolling employees, receiving periodic employer payments, investing in securities, receiving death benefits of the enrolled employees, distributing payable benefits, funding those benefits payments by investing those proceeds, and employing life insurance policies with one-year term dividend rider components.
U.S. Pat. Nos. 5,446,653 of Miller et al. and 5,272,623 of Grubb et al. both relate to a computerized system for putting together select clauses to generate an insurance contract for a particular purpose.
U.S. Pat. No. 3,634,669 of Soumas et al. discloses a portable computer to be used by a salesman for determining the insurance requirements of a prospect.
None of the above discussed patents relate to the use of a computer system for helping an employer evaluate financial aspects of insurance and other benefits for inclusion in a flexible benefit plan for its employees. The differences and disadvantages of traditional or fixed, as opposed to flexible, benefit plans are well recognized by one skilled with employee insurance and benefit programs. The key distinction is that fixed plans require each employee under that plan to accept a preset package of benefits. However, it is apparent that each employee will have significantly different needs and wants. Thus, the use of a fixed benefit plan can lead to inefficient spending on the part of the employer, since employees are likely to receive benefits that they don't need or want. In a flexible benefit plan, employees are able to choose the benefits that they need or want. For example: If given the opportunity to choose from a menu of benefits, a 25-year-old single employee may tend to choose a basic health plan and disability insurance. A 37-year-old employee with a family may tend to choose a "richer" health plan, life insurance, disability insurance, and to fund his/her retirement plan. The 50-year old with grown children may typically choose a health plan, long-term care insurance, and funding for his/her retirement plan. Flexible benefit plans may include some benefits provided as a floor for all employees, such as term life and long term disability insurances.
One difference among employees is the family status of each employee. Family status in turn can determine the benefit needs and, in particular, the medical insurance needs of an employee. For example, one employee may be single, another married and still another married with children. In addition to family status, a particular employee may not need a particular health coverage. For example, a married employee may have a spouse who already has a full family health insurance coverage. As a result the needs of that employee are different and, if he or she had the choice, would elect not to have that potentially redundant health coverage, particularly if the employee could receive a compensatory allowance for opting "out" of the employer's health coverage. It is contemplated that the employee could use that allowance to fund some other benefit or upgrade a particular benefit as would be more needed by that employee. Thus, there is a win-win situation for both the employee and the employer.
Thus, it is evident that the flexible benefits approach permits more efficient use of the employer's benefit dollars, since the employer is no longer spending for benefits that employees may not need or want.
Recent surveys support the concept that employees prefer flexible benefit plans and the opportunity to choose their own unique set of benefits. According to a 1995 Workplace Pulse Survey, 99% of employees say that choice in benefits is important, while 88% say that choice is very important. 63% say that they would be willing to pay more for benefits if they had a choice in selecting those benefits. In a 1994 Workplace Pulse Survey, 38% of employees indicated that they had benefits that they do not need and would not use.
Flexible benefit plans are not new. Many employers, particularly large companies, have adopted such plans. The drawback particularly for smaller companies is one of cost. Many flexible benefit plans are presently prepared by teams of consultants, accountants and actuaries. Often plan preparation is so expensive that incurring such costs appears practical only to large companies with a large employee base and benefit budget. Recent surveys tend to support such a cost constraint factor. According to a 1994 KPMG Peat Marwick Survey, 69% of the companies with 1000-4999 employees have flexible benefit plans. On the other hand, according to a 1994 Johnson & Higgins Survey, 4% of companies with fewer than 500 employees have flexible benefit plans.
A primary requirement of any benefit plan, at least from the perspective of the employer, is the ability to control the cost of its benefit plans. In a traditional fixed benefit plan, the employer controlled costs by defining the benefits its employees will receive and shopping the market for the best, reduced cost benefit products. In a flexible benefit plan, the employer controls costs by defining its contribution or the amount at which the employer will underwrite the benefit plan. For the employer, the ability to control and, in accordance with the teachings of this invention, even to set an exact dollar cost for the entire benefit plan may be a significant motive of an employer to adopt a flexible benefit plan. Another motive may be that by selecting only the products wished or needed, an employee obtains better perceived value for the employer's, and any of his or her own, funds.
The list of benefits may include at least: point-of-service (POS) medical product, health management organizations (HMO) medical product, Preferred Provider Organization (PPO) medical product, indemnity medical product, staff model HMO medical product, group short and/or long term disability, individual short and/or term disability, sick leave group term life insurance, accidental dismemberment and disability (AD&D) insurance, group universal life insurance, individual term life insurance, individual universal life insurance, whole life insurance, spousal or dependent life coverage, a 401(k) or other tax preferred retirement program, defined contribution retirement plan, defined benefit retirement plan, profit-sharing retirement plan, indemnity dental, health maintenance organization (HMO) dental, Preferred Provider Organization (PPO) dental, premium only Section 125 plan (a mechanism to provide many of the benefits on a tax preferred basis), medical reimbursement Section 125 account, dependent care Section 125 account, vision, prescription drug, prepaid legal, long-term nursing care, hospital income and dread disease.
The complexity of the evaluations needed to compose or structure a flexible benefit plan are apparent. In addition to many different benefits available, plan structuring must also consider different mixes of benefits as selected by each of the number "N" employees of a given employer, the number "s" of different classes (logical groupings) of employees, the selected employer contribution(s) to each class of employees, and the elections by each of the "N" employees to opt "out" or "down" for a particular benefit. The number of variables to be considered is great and the cost of analyzing them is high, particularly if done by teams of consultants, accountants and actuaries. The above noted references describe the use of known data processing systems with programmed computers to compose insurance contracts and to report the current status of benefits including terms and coverages to beneficiaries. However at least prior to this invention, computers have not been adapted to the complexities of composing or structuring the financial design of a plan of flexible benefits.
Linear programming is an often used mathematical approach to make business decisions and, in particular, to develop a model whereby the limited resources of a business are employed to maximize profit. The use of liner programming is described in "Sets, Matrices, and Linear Programming" by Robert L. Childiss (Prentice-Hall--1974), Chapter 5--Linear Programming, Chapter 6--The Simplex Method, Chapter 7--Duality and Sensitivity Analysis, Chapter 8--Transportation and Assignment Problems, and Chapter 9--Integer Programming, pp 140-340. This reference is, however, silent as to the use of linear programming to the various problems of planning a plan of flexible benefits, much less how such techniques could be applied to devise benefit plans.